John Embry: Chief Investment Strategist - Sprott Asset Management

GEOFF CANDY: let's look at the broader scheme of things, if you will, and where we are sitting with the US financial system, the US dollar and Europe as well?

JOHN EMBRY: I think, as you know full well, the great issue today is the risk of all sovereign debt in the Western world. I mean Greece is the one at the top of the page right now but it is just one of many - you can go through all the Mediterranean countries, England. And, then you put a microscope on the US which has sort of been forgotten because it is so busy concentrating on Europe and pounding the euro down, it is kind of keeping a bit in the US dollar. But I would submit, if you look closely at the US, both the states and the Fed, their debt issues are equally as serious if not more so.

GEOFF CANDY: John, if we assume that and we have seen some interesting information coming out about Asian gold demand and that we are likely to see gold demand double in China over the next 10 years. Should we be then, changing our focus on where look when it comes to what is driving the gold market?

JOHN EMBRY: Absolutely, that is an excellent observation. If there is one thing that has been true in history, gold has always migrated to the area where the true wealth is being created. And I mean, it is no secret today that Europe and North America's days as the leading economic powers are on the wane. The money is being created and the wealth is building up in the East. And, not surprisingly, that is where the gold is going. India is a major market and China could become the biggest market in fairly short order. I think that was an excellent study done by, either the World Gold council or GFMS because I think it is absolutely correct.

GEOFF CANDY: Does that imply then, perhaps an inflection point in the way in which gold is consumed?

JOHN EMBRY: I think so. I think that North America and Europe are going to become less and less a factor in the market, right now the price is being controlled in the paper market on the LBMA and the COMEX. I think that is in the process of changing, if the physical market takes over, as I think it will, there is no where for the price to go up.

GEOFF CANDY: Why is that?

JOHN EMBRY: Well for the simple reason that the paper markets have depressed the gold price. I can give you any number of metrics that suggest that the gold price should be materially higher than it is. So, if you have short positions and paper gold to the extent that you have right now, the whole situation is distorted. The fact is, and I think there has been some really good work done on this recently, I mean there is so many paper claims on each good delivery bar, that if everyone decided one day that they didn't want their paper gold, they wanted the gold that was supposedly underlying it and they demanded it. It would just blow the top off the market and I think, before this is over, that will occur.

GEOFF CANDY: Is that one of the reasons why you think gold is going upwards?

JOHN EMBRY: I think there are two reasons. I think the fundamentals, the currencies are going down because of the sovereign debt problems that is one main fundamental. And, the other that is probably not as well understood as it should be right now, is this whole paper gold visa vie the amount of physical gold available to cover it. And, I think that the two of them in conjunction will lead to a bull market in gold that is going to shock people. I just find it astounding, I saw that latest report out of GFMS where Klapwijk or Walker was saying that the price of gold might make it to $1,300 but then, the fundamentals were so poor that it was going to go down significantly.

GEOFF CANDY: To play devil's advocate, if one look's at the longer term average, and I am talking 50, 100 year averages now the gold price is lower than it is at this stage. What is to stop gold falling back to that long term mean?

JOHN EMBRY: It isn't gold that moves, it is the value of paper money that changes. We are in the early stages of what I think might turn into some sort of a hyper-inflationary condition because there are not enough savings in the world to even remotely service the amount of sovereign debt that is going to be created in the next few years. So you are going to see the creation of paper money the likes of which we have seldom, if ever. seen in history. So, as the value of the paper money goes down because of its proliferation, by definition, gold, which is in limited supply, the price of it will go up in these paper currencies. So, what has gone before, we have gone through a period of disinflation, certainly since about 1980. Its over. We are heading into a period the likes of which we have never seen certainly in our lifetimes but maybe the world has ever seen before.

GEOFF CANDY: This is now the tenth year that gold has increased significantly, how much longer can it go on?

JOHN EMBRY: I think we have barely started. I think it will go up (I am not sure of time, I am thinking of magnitude and price) if it has gone from $252 at the bottom to $1140 something today, I think it can double probably within a year or two. After that, who knows, it will all depend on the currency markets.

GEOFF CANDY: what are you going to be focusing on over the next couple of weeks?

JOHN EMBRY: I think the key thing I am watching is the unfolding saga with respect to paper gold. There are some very interesting developments that I am not at liberty to discuss at this point going on, on this front. And I thnk as this becomes more obvious to people, I think an awful lot of individuals and institutions that hold ETFs, pooled gold accounts, gold certificates are going to probably start to feel very uncomfortable about what they own. And, if they start moving in the direction of owning physical gold, or vehicles where the gold is allocated and allotted. I think that will have an outsized impact on the price.

GEOFF CANDY: How does this impact the companies themselves, the guys digging it out of the ground?

JOHN EMBRY: Finally, as you know basically they have been falling. People haven't really been too interested in them these days, the price action is dull. I think that the reason for that is that there is a widespread belief, and you cited it yourself why shouldn't gold fall back from here to its traditional levels or however you want to put it. And, with that belief, people are seeing how little money gold companies are making at these gold price levels. So I think that has taken a lot of the enthusiasm out of gold stocks. But, if I am right and the gold price moves sharply higher (and if it isn't up at least $500 in the next six months, I will be surprised) if that occurs, then gold stocks are going to go nuts. Because people haven't believed in them and they will become a spectacular levered vehcicle to take advantage of the rising gold price.